Amid the crisis in West Asia, debt fund managers are repositioning their portfolios by reducing duration, favouring liquid instruments like certificates of deposit (CDs), and increasing cash holdings.
This move has been accentuated because March is a critical month with significant year-end redemption pressures due to income tax outflows and goods and services tax payments.
Defensive Tactics
“As part of risk management, we have reduced our duration portfolio. The risk-reward is not favourable at this point. Therefore, we have increased our cash holdings significantly,” said Anurag Mittal, head of fixed income at UTI Mutual Fund.
Abhishek Bisen, head of fixed income at Kotak Mutual Fund added that recent market volatility has prompted some repositioning. “We have reduced corporate bonds and preferred more G-sec or state development loans (SDL). In addition, we have added more certificates of deposit versus commercial deposits. In such a fluid situation, it is important to stay liquid.”
According to industry sources, some mutual funds shifted to CDs in February itself as rates rose due to increased supply.
Bisen expects the Reserve Bank of India (RBI) to maintain ample liquidity in the system, which will also help contain the G-sec market and the overall interest rate environment.
RBI Intervention
Over the past two weeks, the RBI has purchased bonds in the secondary market to ease liquidity pressures stemming from its forex interventions. It also conducted open market operations (OMO) worth Rs 1 lakh crore this week.
Despite inflationary pressures driving G-sec yields to 6.76%, the RBI intervention curbed a sharper rise and brought it down, according to market participants. The yield on the benchmark 10-year rose just 2 bps since the war broke out. The yield ended at 6.68% on Friday.
“To navigate potential challenges ahead, we are holding our portfolios in highly liquid instruments like bank CDs, treasury bills, and sovereign papers. We have increased allocation to CDs by 5-7%. Initially, when the war broke out, we also trimmed some corporate bonds,” said Marzban Irani, chief investment officer – debt, LIC Mutual Fund.